Edited version of private advice

Authorisation Number: 1052076545056

Date of advice: 16 January 2023

Ruling

Subject: Commissioner's discretion - deceased estate

Question

Will the Commissioner exercise his discretion under Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) to extend the 2-year period to dispose of the dwelling located at XX XXX?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away on the XX August 20XX.

The deceased acquired the property at XXX on XX November 19XX.

At the time of death, the deceased was residing in an aged care facility, no one else was living at the property.

The property was situated on less than two hectares of land.

The property was not producing assessable income.

The deceased's last Will dated XX October 20XX appointed XX as Executor and Trustee of the deceased estate.

Probate was granted on XX November 20XX.

In January 20XX the Executor ("you") allowed friends to move into the property as caretakers, rent free, until XX December 20XX.

In March 20XX travel restrictions returning into State 1 were imposed by the State Government due to Covid-19 which made is difficult for you to return from State 2.

You were diagnosed with a medical condition in September 20XX and on XX November 20XX attended a medical facility in State 2; this was an initial X day stay with another month of recovery in State 2, then another XX months of recovery in State 1.

You sustained another medical condition on XX August 20XX, attending a medical facility on the XX September 20XX and spending XX weeks recovering with a further XX months regaining health.

Your child gave birth in COUNTRY 1 in June 20XX, and once Covid travel restrictions were lifted you visited your grandchild from February to April 20XX and again July to September 20XX.

In May 20XX you organised for some necessary repairs to be undertaken; these were hampered due to the weather and were completed in September 20XX.

The property was listed for sale in September 20XX and received an unconditional offer on the XX October 20XX with settlement taking place on the XX December 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-195

Reasons for decision

Section 118-195 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a capital gains tax (CGT) exemption to beneficiaries and trustees where a CGT event happened to a dwelling they acquired from a deceased estate.

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or loss may be disregarded where a capital gains tax event occurs disposing of a dwelling passed to a beneficiary of a deceased estate within 2-years of the deceased's date of death, or, from the deceased's death until the disposal, the dwelling was the main residence of:

•         the spouse of the deceased immediately before the death; or

•         an individual who had a right to occupy the dwelling under the deceased's Will; or

•         the individual to whom the ownership interest is transferred as a beneficiary and is then sold by that individual.

Additionally, if the property was acquired after 20 September 1985, the dwelling must have been used as the deceased's main residence before their death and not used to produce assessable income.

In this instance the house was not occupied by a spouse, no individual had the right to occupy under the deceased's will, and the property was not occupied by a beneficiary to whom the property had been transferred under the will.

Practical Compliance Guideline PCG 2019/5: The Commissioner's discretion to extend the 2-year period to dispose of dwellings acquired from a deceased estate outlines the factors that the Commissioner will consider when determining whether or not to exercise the discretion to extend the 2-year period under section 118-195 of the ITAA 1997. Generally, the Commissioner will allow a longer period where the sale of the dwelling could not be settled within two years of the deceased's death due to reasons beyond your control that existed for a significant portion of the first two years. However, PCG 2019/5 provides that the following factors weigh against the Commissioner allowing a longer period:

•         You waited for the property market to pick up before selling the dwelling

•         Delay was caused to the disposal of the property due to refurbishment of the house to improve the sale price

•         Delay to disposal of the dwelling was caused as a result of inconvenience on the part of the trustee or beneficiary to organise sale of the dwelling, or

•         Delay was caused by unexplained periods of inactivity by the executor in attending to the administration of the estate.

Application to your circumstances

The deceased passed away on XX August 20XX. Two years from this date is XX August 20XX. As at XX August 20XX your ownership interest had not ended. The relevant capital gains tax (CGT) event, i.e. the disposal of the property which occurs upon settlement, did not occur until XX December 20XX, almost XX months after the expiration of the 2-year period. You contend that the delays were primarily due to the trustees of the estate being impacted by the COVID19 pandemic lockdowns and various health issues of the executor.

In applying the legislation to your circumstances in the view of the Commissioner of Taxation, there is no specific qualifying event or situation that occurred, outside of the trustees' or executors', causing a delay in the sale of the deceased's interest in the property.

We acknowledge the sensitivity of the personal circumstances which you were experiencing. We understand that this may have made the administrating of the will more difficult. Further issues were identified and treated in approximately September 20XX and October 20XX, which was XX months after probate had been granted.

We compared this situation against Example 7 in PCG 2019/5 (Paragraphs 45 To 47). In Example 7 there is one executor. Shortly after probate was granted, the executor was diagnosed with a serious illness and spent a large period of time hospitalised. As soon as the executor's health improved, the property was cleaned out and placed on the market. The period for which the discretion was needed was approximately 7 months.

In your case diagnosis did not occur until approximately XX months after probate. A contract for the sale of the property was not entered into until approximately XX years and XX months past the date of death of the deceased.

Whilst it is accepted that the COVID19 pandemic is a circumstance beyond your control, the decision to postpone the sale did not restrict your ability to start the process of getting the property ready for sale. Tasks to prepare the property were commenced well outside the 2-year period. However, none of the work had commenced or completed within the expiration of the 2-year period to allow the sale to be completed within two years. It was not commenced or completed until after the 2-year period had expired.

The information and documentation provided does not support that the deceased's estate was of a complex nature. Therefore, this is not a factor that the Commissioner would take into consideration when making the decision on whether or not to exercise his discretion to extend the 2-year period to dispose of the property.

Accordingly, the conclusion that can reasonably be drawn is that the delays in the sale of the property were due to choices you made regarding when you began preparing the property for sale and were not due to circumstances beyond your control.

The Commissioner has not exercised the discretion to extend the 2-year period to dispose of a dwelling under section 118-195 of the ITAA 1997. Therefore, any capital gain made on the property from the date the deceased passed away until the property is disposed of will be taxable. The first element of your cost base for the property will also be its market value on the deceased's date of death.